chapter 4

  1. accounting cycle
    The process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance.
  2. clearing account
    Another name for the income summary account because it has the effect of clearing the revenue and expense accounts of their balances.
  3. closing entries
    The entries that transfer the balances of the revenue, expense, and drawing accounts to the owner’s capital account.
  4. closing process
    The transfer process of converting temporary account balances to zero by transferring the revenue and expense account balances to Income Summary, transferring the income summary account balance to the retained earnings account, and transferring the dividends account to the retained earnings account.
  5. closing the books
    The process of transferring temporary accounts balances to permanent accounts at the end of the accounting period.
  6. current assets
    Cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business.
  7. current liabilities
    Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.
  8. fiscal year
    The annual accounting period adopted by a business.
  9. fixed assets (or plant assets)
    Longterm or relatively permanent tangible assets such as equipment, machinery, and buildings that are used in the normal business operations and that depreciate over time.
  10. Income Summary
    An account to which the revenue and expense account balances are transferred at the end of a period.
  11. long-term liabilities
    Liabilities that usually will not be due for more than one year.
  12. natural business year
    A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.
  13. notes receivable
    A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate.
  14. real (permanent) accounts
    Term for balance sheet accounts because they are relatively permanent and carried forward from year to year.
  15. temporary (nominal) accounts
    Accounts that report amounts for only one period.
  16. Liquidity
    The ability to convert assets into cash.
  17. Solvency
    The ability of a firm to pay its debts as they come due.
  18. Current Ratio
    A financial ratio that is computed by dividing current assets by current liabilities.
  19. Working Capital
    The excess of the current assets of a business over its current liabilities.
  20. Closing Entries
    • Transactions are analyzed and recorded in the journal.
    • Transactions are posted to the ledger.
    • An unadjusted trial balance is prepared.
    • Adjustment data are assembled and analyzed.
    • An optional end-of-period spreadsheet is prepared.
    • Adjusting entries are journalized and posted to the ledger.
    • An adjusted trial balance is prepared.
    • Financial statements are prepared.
    • Closing entries are journalized and posted to the ledger.
    • A post-closing trial balance is prepared.
  21. Two sections of assets
    current assets and property, plant, and equipment.
  22. Two sections of liabilities
    current and long term liabilities.
  23. what does the post closing trial balance exclude?
    revenue, dividend and expense accounts.
Card Set
chapter 4
Completing the accounting cycle